The unsuspecting borrowers now facing a mortgage cliff

Australians who recently fixed their mortgages at super low rates are now staring down the barrel of punishing repayments up to two or three times higher when they inevitably roll onto a variable rate, an economist from a leading bank has warned.

A series of interest hikes, which caught many by surprise, has suddenly heaped pressure on already strained budgets and caused clouds of uncertainty to gather over a property market which has topped out and is heading down.

Encouraged by historically low rates, an unusually high number of Australians have locked into fixed mortgages over the past two years.

House prices are expected to fall up to 20 per cent over the next 12-18 months.
House prices are expected to fall up to 20 per cent over the next 12-18 months. (APA)

According to analysis from AMP Capital, fixed lending usually makes up 10-15 per cent of the total mortgage market, but that number quadrupled to over 40 per cent last year.

“That’s where the concern comes from,” Diana Mousina, a senior economist with AMP, told 9news.com.au.

Many will roll off fixed-term loans in the second half of 2023, Mousina said, leaving up to 1.3 million borrowers scrambling to cope with much higher monthly repayments.

“Given how high interest rates are expected to go, there will be some households that will struggle to meet repayments,” Mousina said.

People who had taken out mortgages in the past three years would “face the most trouble”, she said, because many of those loans would most likely have been fixed.

Graph showing variable and fixed rate mortgages in Australia between 2019 and 2022.
Housing lending emerged in 2021 for owner-occupiers as demand for new homes got a boost from low interest rates, government fiscal transfers to households and the HomeBuilder subsidy, with lending up by 26 per cent over the year to December 2021. (AMP Capital)
Among that group will be now-anxious first home buyers who entered the market with confidence on the back of RBA statements, made throughout most of last year, which said the bank foresaw does not rise until 2024.

That has turned out a duff – and for some, very costly – prediction.

Australian borrowers are braced for further increases through to the end of the year.

speaking last weekthe bank’s deputy governor Michele Bullock said “just under 30 per cent of borrowers would face relatively large repayment increases of more than 40 per cent of their current payments”.

Those borrowers would experience a median increase of around $650, or 45 per cent, in their monthly repayments, Bullock said.

Based on RBA assumptions, around 1.3 million households would be affected.

“That’s huge,” Mousina said, while also suggesting the deputy governor had “kind of underplayed the potential impact to households” during her speech to the Economic Society of Australia.

“It’s hard to actually say ‘X’ number of households will not be able to make their repayments,” Mousina said, when asked how many Australians could fall into a hole of mortgage stress.

“But I think it’s fair to say that households will struggle with higher interest rates, given the quantity of households that are going to see a very large lift in repayments.

“And for that reason, it’s very likely that consumer spending will slow quite significantly into the end of this year and into next year as well.”

Graph showing the different kind of mortgages in Australia over the past 20 years.
Usually, fixed lending is 10-15 per cent of total outstanding lending in Australia but in 2020/21, this lifted to over 40 per cent. (AMP Capital)

Mousina said AMP was maintaining its prediction that house prices will fall 15-20 per cent, bottoming out in the second half of next year.

“That’s obviously negative for household wealth, and for people’s perception of their wealth,” she said.

Despite the gloom, Mousina said a “significant build up” of consumer savings of around $250 billion amassed over the pandemic was a considerable positive, with that cash now a potential softener for the looming financial hit.

Housing lending surged last year as demand for new homes was boosted by historically low interest rates and government schemes like the HomeBuilder subsidy.

Over last year, lending rose 26 per cent.

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